For small business owners, securing capital can be challenging, especially when traditional lenders like banks reject loan applications or broad-scale economic disasters like COVID-19 hit.
In such cases, business owners may turn to alternative funding sources, like a merchant cash advance (MCA). However, while these funding options may seem convenient, they can lead to financial pitfalls and long-term debt that’s difficult to escape.
Although it operates similarly, a merchant cash advance is not considered a loan by lawmakers. It’s a financing agreement where a business sells a portion of its future credit card or debit card sales in exchange for immediate cash. The advance is repaid through a percentage of daily or weekly sales until the total amount, plus fees, is paid off.
By purchasing future receivables, lenders argue they’re not technically loaning money andand therefore are able to skirt strict usury laws that limit the amount of interest that can be charged. This distinction is important as it allows the lenders to charge much higher interest rates than normally allowed. Given their (intentionally) complex fee structure, exact annual interest rates are difficult to calculate, but they are typically in the triple digits.
Also, unlike traditional loans, MCAs are more accessible to businesses with poor credit or limited financial history. They appeal to small business owners because the application process is fast, approval rates are high, and collateral is typically not required.
However, these benefits come with a high price.
Merchant cash advance lenders are some of the most aggressive and persuasive marketers out there. They proactively peddle their predatory loans to unsuspecting small business owners desperate to keep their businesses afloat or simply tempted by the unsolicited opportunity to grow their business with a capital injection.
They promise:
To any small business owner, these benefits are tempting, but they’re just too good to be true.
While MCAs might seem like an appealing solution, they carry significant risks. Here are some of the hidden dangers that small business owners should be aware of.
Watch this video, plus more business debt relief FAQ videos, on our YouTube playlist.
Although MCAs are marketed as a simple way to receive quick cash, their fee structures can be difficult to understand. This complexity allows lenders to charge far higher interest rates than traditional loans. The annual interest rates on MCAs can be equivalent to 200%–400% or more, making them a costly option for small businesses. These high rates often trap businesses in a cycle of debt, where they struggle to pay off the MCA and meet their regular expenses.
Another danger associated with MCAs is the use of Uniform Commercial Code (UCC) liens. When a borrower defaults on an MCA, the lender can file a UCC lien, which grants them the right to seize the borrower’s assets. Lenders can send UCC collection demands to customers or merchant accounts, freezing funds or diverting them to the lender.
Many business owners mistakenly assume that long-standing customer relationships will protect them, but this isn't the case once a UCC lien is in play.
Some MCA agreements include a Confession of Judgment (COJ) or Agreed Judgment clause, which can be even more dangerous. These clauses allow lenders to obtain a judgment against the business without a court hearing. Once the COJ is signed, lenders can seize assets, foreclose on properties, and freeze bank accounts.
Unfortunately, many business owners don't realize the power of these clauses until it’s too late, and their accounts are already frozen.
MCA contracts are often riddled with provisions that disproportionately favor the lender, such as the ones listed above. These can include severe penalties for seeking additional loans, attempting to modify payment terms, and even delays in repayment. Such provisions can make the MCA even more unaffordable for a struggling business and lead to further financial distress.
Given the risks associated with MCAs, business owners should consider safer alternatives. If you need financing and haven’t already agreed to an MCA, try exploring these options first:
If your business is already burdened by merchant cash advance debt, it’s crucial to seek legal assistance as soon as possible. MCA lenders are notoriously aggressive in their collection efforts, but there are options available to stop lender harassment, negotiate reduced settlements, and regain control of your financial situation.
At the Lane Law Firm, we have over 15 years of experience helping small businesses find merchant cash advance debt relief. After learning about your unique situation, we can determine the best course of action. Some actions we typically take in MCA cases are:
Don’t wait until it’s too late! MCA lenders have aggressive attorneys on their side—so should you. Schedule your free, no-obligation consultation today.